The news coming out of the latest G20 summit in Japan has been largely focused, just as Donald Trump likes it, on his trade war with China. But has the self-styled Dealmaker-in-Chief made a tactical error by appearing to relax punitive rules imposed on one of the Middle Kingdom’s leading tech firms, Huawei?
While the details are still to be hammered out, the announcement would appear to be good news for US tech firms, in the short term at least. But it will only serve to buy Chinese firms more time as the country accelerates towards tech self-sufficiency, while failing to resolve the question of who builds America’s 5G networks.
A good day for Huawei
Trump’s announcement over the weekend came after he and Chinese President Xi Jinping met at the meeting of world leaders in Osaka. The two agreed to resume trade talks, halting the imminent imposition of tariffs on a further $300bn of Chinese imports to America as well as relaxing rules preventing US firms from selling components to Huawei. The latter agreement effectively reverses a decision made last month to stick Huawei and 70 subsidiaries on an “entity list”, although even this had been subject to a subsequent 90-day delay. That decision was touted as one made on national security concerns about the Shenzhen-based network equipment and smartphone manufacturer, although Beijing officials have claimed it was more aimed at constraining the global rise of China’s tech giants.
National Economic Council chairman Larry Kudlow subsequently clarified that these US national security concerns “are still paramount”, and that the new agreement did not amount to a “general amnesty”. Instead, it will only “grant some additional licenses where there is a general availability” of the parts needed by Huawei. These include key processors and software produced by US firms. Huawei was hit for six by the US Commerce Department order in May, which imperilled the supply of key smartphone kit from Qualcomm as well as Intel server and laptop chips, Xilinx and Broadcom networking kit and even Google Android support.
Kicking the 5G can
US technology firms will certainly be happy with the G20 decision. Losing one of their biggest Asia clients – one of the world’s top three smartphone producers – would have been a major financial blow. But it does nothing to address the other key China initiative taken by the Trump administration in late May: declaring a national emergency preventing the supply of IT services and equipment from firms (like Huawei and ZTE) considered under the direction of foreign adversaries.
There is therefore still a huge question mark over how the US competes with China more broadly when the only viable supplier of 5G networks at present is Huawei. Its kit is said to be cheaper and as much as a year more advanced than rivals like Nokia and Ericsson. Washington’s decision to block on national security grounds threatens to stall progress in IoT and smart cities, autonomous vehicles and other sectors which are waiting for 5G to accelerate to the next level of development. More important still, there may be significant military advances being held up by these 5G delays.
Former Pentagon official and visiting fellow at The Heritage Foundation, Steve Bucci, is optimistic that homegrown solutions can be found.
“Trump’s comments do not lift these [5G] restrictions, which is spot on. We cannot lift them safely,” he told me by email. “The answer is to challenge US companies to pick up the baton. They can do it technologically, and just need a little assurance their investments will not be in vain. Additionally, it would probably give our allies and friends a few more options.”
An uncertain future
Yet given the hundreds of billions Huawei and China have spent in gaining an advantage in 5G, it’s unlikely at present that US firms can catch up. That could mean long-term decline for its telecoms sector and missing out on a huge economic dividend.
“The leader of 5G stands to gain hundreds of billions of dollars in revenue over the next decade, with widespread job creation across the wireless technology sector,” a Pentagon report warned in April. “The country that owns 5G will own many innovations and set the standards for the rest of the world. That country is currently not likely to be the United States.”
In the meantime, the Trump administration’s initial decision to put Huawei on a trade blacklist will only have strengthened Xi Jinping’s arguments at home that China is still too reliant on the US for key technology components.
Roslyn Layton, co-creator of ChinaTechThreat.com, member of the Trump Transition Team for FCC, argued via email that “Huawei is in a death spiral”.
“If Huawei doesn’t have access to the essential patents from Qualcomm, Huawei is out of business. Huawei can’t make 5G equipment without these patents,” she added.
This may be true. But you can be sure that it and more generally the Chinese state will be working hard to become self-sufficient in these components. Deals like the G20 one simply buy them more time. The long-term picture for US tech suppliers with major markets in China and the many thousands of businesses waiting for 5G networks is far from rosy.
I’ve been doing a bit of work researching a piece on the latest Lenovo bombshell to hit the tech world – its $2.9bn bid for Motorola Mobility. Now, in my innocence, I reckoned there might be quite a few hurdles for Lenovo on this one, but the analysts I spoke to were pretty upbeat on the deal.
Remarkably, most were pretty confident this was a good buy and that it’ll help propel the firm to third in the global smartphone stakes in a matter of a couple of year.
It’s easy to see why on paper. Here’s what Canalys APAC MD Rachel Lashford told me were the main benefits for Lenovo:
· Immediate entry to the US market, Motorola’s major market, as well as key markets in Western Europe and Latin America.
· A unique relationship with Google.
· Credibility with operators and consumers worldwide.
· Existing US operator relationships and a handful of global ones.
· Additional experienced phone sales teams.
· Additional and highly rated phone engineers.
· Additional tablet and phone shipments, as it becomes the key manufacturer of Google’s Nexus line.
Hard to argue with that lot. It’s also hard to see how Lenovo could have done better than Motorola – there wasn’t much choice out there, after all (BlackBerry? HTC?). Except that doesn’t mean it’s going to be a success. Although it has high brand recognition in the US, Motorola is a fading star, with neither innovative designs or huge volume sales to its name.
I wonder then if it’s really going to give Lenovo that huge leg-up into the US smartphone space it desperately wants. I’ll be even more surprised if Lenovo merges the two brands, as various analysts told me will happen eventually, unless Plan A has succeeded perfectly.
The thing I imagined would cause the biggest potential roadblock is a US political backlash. Lawmakers can be a pretty obstinate bunch, especially when they feel their country is being invaded by ‘foreign hordes’.
It’s certainly right to say that Lenovo has a better relationship with the US government – where ThinkPads are still used – than most Chinese firms, and that consumer smartphones are hardly a national security matter, unlike telecoms infrastructure (sorry Huawei, ZTE). But I still think there’s the potential for a unwelcome bit of political interference here, especially if some more news comes to light on Chinese spying and state links to tech firms.
Given the stakes, it’s not surprising Lenovo has apparently hired some big name attorneys, some of whom have worked for the CIA and Homeland Security, to help it lobby the deal through.
Lashford even speculated that “announcing two deals in one month will ease its progress, not complicate it”. I suppose we’ll all have to wait and see on that one.
One thing’s for certain: Motorola employees will be a happy bunch. I wonder how may will be queuing up for Lenovo CEO Yang Yuanqing’s annual $3m employee bonus giveaway?